As the news of declining sales for existing homes has captured headlines as of late, the underlying highlight of a declining inventory of unsold homes is encouraging news for the housing market. At the end of August, total housing inventory dropped 10.8% to 3.82 million existing homes for sale, representing a proposed 8.5-month supply and the lowest level seen in a year (not seasonally adjusted). Real estate is cyclical, seasonal and emotional, so declining sales for existing homes is expected, as the seasonal cycle wraps up and the $8,000 tax credit comes to a close. What’s more significant is the decline in housing inventory.

The Housing in Crisis report discussed the extreme oversupply of housing as a primary factor in the housing boom. Using this report, which utilizes a 3.5 million growth rate in population at a 2.7 average unit size, 1.3 million new housing units can be absorbed annually. This means that it will take three years for a complete housing absorption in the market. Until this happens, property values will remain flat.

What would be interesting to know is the details of the 3.82 million existing homes on the market. Does this number include new construction? What exactly qualifies as an existing home? Based on various reports I’ve searched, the 3.82 million represents homes available for salewhich would not include new construction if true. Regardless, this news of declining inventory is a great sign of steps in that necessary direction. As the market corrects itself with property values, inventory and prices, a housing recovery is in place.

The following commentary is in repsone to a recent Crain’s New York Business article titled “Shadow units cast pall” by Amanda Fung. The article discussed a glut of “shadow inventory” in New York City, particularly in Williamsbug and Manhattan. Sources claimed that Manhattan had more than 10,000 unsold condos. Based on my findings, the data and information being presented in the article proved to be misleading, if not out right false. Here is the response. Remember, real estate is three things: Cyclical, Seasonal and Emotional.

Amanda

I had the opportunity to read your article regarding Shadow Inventory in the Crain’s Online Publication. My initial reaction was there are always two sides to every story. But as I reviewed the data that was being quoted, I became concerned with some of the facts and data provided to you. My focus of concern is the condominium market and discussions related to Shadow Inventory, and more importantly data provided by the real estate sources referenced.

In the 25 years that I have been valuing and analyzing real estate, the term “Shadow Inventory” has never been presented before. What I gather is that this is a buzz word used to discuss inventory that has been built, is under construction or just coming on the market. This has never been called Shadow Inventory, but pending inventory.

Because the property data being presented in the article contradicts reports I have prepared and published, I started to review the information by outside sources that was provided to you in more detail. The 18 month supply issue baffles me because I simply cannot determine where this comes from. Also, the “glut” of Williamsburg has me confused. Analysis of construction activity, public records and sales activity clearly indicate that Manhattan alone absorbs about 9,000 new condo units a year. For 2009, sales activity and public records indicate an annualized absorption of about 6,000 units. This would be 3,000 off the peak, so again how does 3,000 fewer units sales compute to 10,000 unsold units. Also, the 7,000 plus units coming on line in 2010 will be absorbed into the market based on Historical Sales and building Activity.

Yes, there has been a decline in sales activity since the peak of 2007, but new construction has not exceeded demand in population growth and affordable housing. The key word is affordable. The fact that a developer lists a property too high relative to the market does not indicate a collapse, but a misinformed seller.

Your article is an amazing coincidence for me, because hours before I read it, I completed an in-depth analysis of Williamsburg/Greenpoint condo market for a client. What I discovered was not a “glut” of housing, but incorrectly priced housing. My clients project was listed by a real estate agent with unit values $100,000 above the market and incorrectly stated square footage. My firm has been arguing this point for years, it is all about the property data. Based on the recommendations provided, the client relisted the units at the prevailing price per square foot rate for walk-up condo units of $550 psf. He has already received four inquiries, with one being a serious buyer. He did not receive a single call on the building in the past three months. My analysis does not indicate that this community is in a “bust stage”.

Bad data, bad analysis, inept Real Estate Broker and misinformed seller are all to blame. What is most disturbing is bad data and bad analysis.

The following is a summary of my analysis that was provided to the client:

Since 2000, the following construction activity has occurred in the City based on the 2009/10 New York City Department of Finance Records:

Single Family Homes 9,012 new units

Two Family 25,974 new units

Three Family 6,157 new units

Tax Class I condos 719 new units

Tax Class II condos 26,699 new units

“454 sales have occurred in Williamsburg/Greenpoint market in the past year. There are 192 sales classified as walk-up condominium projects with an average sppsf of $570.86 and Median of $569.17. Given the location of your property, I recommend listing at $550 psf for 1 Bedroom Units and be prepared to accept 10% less. Development around your complex will draw buyers, but there is a correlation to subway proximity and value. Hence the 10% lower acceptance. The number of new units coming on the market is meeting the demand of residents from the Lower Eastside, notably NYU students who cannot afford to rent or buy in Manhattan. Over the past 10 years, NYU has acquired many housing units south of 23rd which has driven up housing costs. After 9/11 Williamsburg/Greenpoint experienced a revitalization effort that has brought a new wave of construction and demand for the area. Current market conditions mean that you have to price correctly, the prior listings could have potentially hurt your efforts, creating a distress situation perception in the market.”

Amanda, some questions about the data provided to you!

According to your article, Jonathan Miller states that there are 10,445 unsold condo units in Manhattan, plus another 7,000 coming on-line. He calls these shadow units. According to the New York City Department of Finance, for Manhattan there are:

Class I Condos: 198 total units

Class II Condos: 100,173 total units

Public records show a total of 26,699 units were constructed since 2000. This represents over 25% of all condominium units. Mr. Miller is stating that 10% of all condos are vacant or unsold? And by unsold, does that mean there is a current owner who wants to sell or can’t sell?

Based on Mr. Millers comments, 10% of all condo’s are on the market in Manhattan, with another 7% coming on. This just does not factor correctly and here is why:

Since 2003 there has been no more than 10,000 valid sale transfers per year of condominium units in Manhattan. (See table below). Mr. Miller states that there are 10,445 unsold units in inventory which appears to be a normalized number, so what is the point. This isn’t of much significance given the history of sales for condominium units. As a matter of fact, all units constructed since 2000 have been absorbed into the market within a very finite time (less than 6 months). Following is more information to support our data points:

Since August of 2008 there have been 10,076 condo sales in Manhattan. This represents 10% of all properties. When only usable sales are considered, (indicated square footage over 200, valid sale price over $10,000), the number is reduced to 5,407 sales or 5.4% of all condo properties with an indicated Average Sales Price of $1,805,328 and Median of $1,089,527. The variance is rather significant. Analysis of 2009 Sales Only shows 1,764 valid sales with a Average sale price of $1,656,783 and Median of $1,025,000. Perhaps the use of the Average and Median Sale price is confusing some, because the Sale Price Per Square Foot provides a totally different view of the market.

Average Sales Price Per Square Foot

$1,229 (7/2008 to 7/20009)

$1,180 (’09 Only)

Median Sales Price Per Square Foot

$1,145 (7/2008 to 7/2009)

$1,070 (’09 Only)

Square Footage has a significant impact on the values, with less than a 7% variance between Mean and Median, and property values from 2008 to 2009 are only down 4%, not the 30% levels being reported by some. And we cannot just rely on the Average and Median Sale Price alone.

Further Analysis by Sales per Year since 2003 indicates the following (Click To View)

Useable Sales are defined as sales greater than $10,000, greater than $100 per square foot and having a valid square footage greater than 200 feet (minimum required for living space).

Usable sales historically represent about 60% of all sales. Since July of 2008, this figure has dropped to 54% and for all sales in 2009 it is at 46%. 2009 is projected to have the lowest useable sales on record since 2003.

CURRENT value indicators clearly show that on a rate per square foot basis the Manhattan Condominium Market is off in value by less than 4%. (all data used in this analysis is obtained from the NYC Department of Finance and is 100% verifiable).

You have quoted many individuals and their opinions in the article, but they appear to be lacking the data like the statistics being presented above. It concerns me when I believe reporters receive information from sources that appear to have a hidden agenda. The developments coming on line can easily be absorbed into the market.

Again I will state, Bad data, bad analysis, inept Real Estate Broker and misinformed seller are all to blame for listing properties to high. Analysis of actual data and using accepted and appropriate statistical analysis yields results that are explainable and defensible. Quoting individuals without verification from noted and verifiable sources impinges the creditability of the article.

According to the US Census and other public records on property data, there were 3.328 million Housing Units for NYC in 2008. Of this, 61,000 rental units were held vacant and 26,500 owner occupied units held vacant. The total number of units held vacant in NYC is 2.6% of the total housing units. This is well below the National Average of 13.8%. (See the Housing In Crisis reportfor more details).

Remember that Real Estate is three things: Cyclical, Seasonal and Emotional. Population growth is over 390,000 people since 2000. This represents over 43,750 individuals per year or 16,203 New Households per year. Public records indicated the growth in housing units from 2000 to 2008 consisted of 29,006 new Class I Structures for a total of 53,567 new housing units. Class II and Class IV properties increased by 3,472 for Walk-up and Elevator Apartments accounting for over 97,583 new housing units and there were 26,699 new condominiums built. All told, this property development can accommodate a population of 461,167 individuals with an average Household Size of 2.7.

This does not consider the temporary housing for college students and foreign workers. Nor does it accurately reflect that most condominium units are owned with a population size less than 2. If one considers the unique trends of Manhattan, the current building supply in New York City, as stated above, is in balance.

New York City does not have a Shadow Inventory, just smart investors. Why sell when the housing market is weak? Hold on a year and get at least 10% more for your property. We are confusing a smart investor/developer with a property owner who panics. When you can rent and wait out the market, that is smart. Developers, unlike banks, know that dumping product drops values.

Where did all of the common sense go? Sales activity is down because unless you need to sell, you sit tight. Determining current housing market values based on reduced sales activity is not only misleading, but just flat our irresponsible.

July 17 (Bloomberg) — Housing starts in the U.S. unexpectedly rose in June as construction of single-family dwellings jumped by the most since 2004, signaling the market is stabilizing.

We’ve just recieved news of 1.5 million foreclosures in the first half of the year. This means that including what’s out there, there is a tremendous oversupply of housing in the market, not including any shadow inventory the banks are holding onto.

Stabilization would rid the economy of the drag from declines in residential construction that have shaved almost a percentage point off growth over the last three years.

Again, what exactly is the benchmark for this. 700,000 housing starts? 800,000? 900,000? 1 million? The drag in declines could be attributed to the boom of residential construction in the years prior that brought us into this predictament.

Construction of single-family homes jumped 14 percent, the biggest gain since December 2004, to a 470,000 rate. The fourth consecutive increase brought single-family starts to the highest level since October. Work on multifamily homes, such as townhouses and apartment buildings, dropped 26 percent after surging 66 percent in May.

This is an interesting statistic. First, multifamily, townhouses and apartments have a great surge in May. However single-family starts have had a recent surge, while multifamily, townhouses and apartments have dropped. I wonder what this could be attributed to?

The increase in starts adds to signs that the housing slump may be nearing a bottom. Combined sales of existing and new homes climbed to a 5.1 million annual rate in May, the highest level so far this year.

There’s more factors that need to adressed, besides citing housing starts. With foreclosures and unemployment both rising significantly, how many people will be looking into buying new, single-family homes?

Home starts were down 46 percent from a year earlier, today’s report showed, and are down from a peak annual rate of 2.27 million in January 2006, which capped the biggest housing boom in six decades.

The biggest in 60 years. So maybe that wasn’t a good thing? I wonder, if compared to historical property data, how home starts are doing. Not comparing them to a 60 year occurence.

New-home sales likely will be little changed in coming months because of low consumer confidence and the difficulty would-be buyers have getting loans, Pulte Homes Inc. Chief Executive Officer Richard Dugas said at an investor conference June 23.

Yet, we’re still building.

“Buyers are unwilling and unable to take on new mortgages,” Dugas said at a conference in Boston. “Despite the record fall in prices and the tremendous deal that consumers get relative to the 30-year mortgage rates where they are today, we’re still having difficulty convincing people to get into the market.”

And we’re still building

As stated before, there is natural cycle of population growth, that causes for natural housing starts. An uptick in housing starts is no big news with seasonal activity.

Excerpts from CNBC.COM

Warren Buffett confirms what few analyst have been reporting; home construction spearheaded the recession and halting it is the first step to recovery.

“There is no silver bullet,” Buffett adds. “The original cause of this was the housing bubble… we built a couple million housing units a year… surprise we had too many houses.. you can’t work that off in a day, week or month. The best thing we can do is not to be building a lot of new houses.”

Months ago, the Housing in Crisis report produced by AccuriZ indicated the impact of home construction on the economic crisis.

Public records show that from 2000 to 2008, 15.1 million homes were constructed. When the property data is weighted against natural population growth – even including the influx of illegal immigrants – there was a substantial amount of excess housing. Given the average household size, the population would have had to increase by 40 million since 2000 to absorb the housing. In actuality, it has only increased 25 million, well short of lofty housing expectations. At the end of 2008, 5 million homes were unoccupied. With rising foreclosures and banks holding onto more properties soon to be foreclosed, total absorption of home construction would take over a year.

[“There is no silver bullet,” Buffett adds. “The original cause of this was the housing bubble… we built a couple million housing units a year… surprise we had too many houses.. you can’t work that off in a day, week or month. The best thing we can do is not to be building a lot of new houses.”]

But rising numbers in building permit applications and home construction threaten this statistic. The same process of oversupply that Buffet says initiated the crisis is being permitted to continue. If any significant signs of recovery are to occur, home construction must remain at its natural cycle of 500,000 to 600,000 homes a year until the absoprtion of the excess is completed. Hopefully now that Buffett has reiterated this point, people become aware of the problem that lies ahead. The welfare of an entire population should not be sacrificed for the benefit of a few.

“That’s tough on the homebuilders but that’s the prescription for getting supply and demand back in balance,” Buffett says.

Excess growth in the housing market was a key factor in the economic downturn that we are now trying to recover from, according to the latest market report by AccuriZ. The report, entitiled Housing In Crisis, indicates that a huge surge in home construction since 2000 was not supported by the natural population growth cycle at the same time. This excerpt explains the chart above;

“Household size appears to be fairly stable at 2.7 for the past thirty years. Applying the average household size of 2.7 with the growth in housing units of 15.1, the population would have increased by 40 million since 2000 versus the actual growth of 25 million as reported by the Census Bureau.”

Given the property data, the supply and demand factor of the housing market was severly imbalanced, as there were simply too many homes being built without enough people to fill them. From 2000 to 2008, 15.1 million units were built, based on public records. While this complies with historical trends of housing starts in previous decades, this surge occured within an 8 year span.

“Correlating census estimates with existing occupied housing unit data, one can surmise that the actual number of housing units developed over the past eight years exceeded market demand by 600,000 units per year since 2000. Applying the results of this analysis and considering natural building permit activity, one could conclude that the existing over supply of housing will take no less than two years to be absorbed, possibly longer in areas with extensive over development.”